July 12, 2010 / 2:44 PM / in 7 years

Canada business outlook bright as rate hike looms

OTTAWA (Reuters) - Canadian businesses remain upbeat in their outlook for sales, investment and hiring, but their optimism is tempered somewhat by fears that global uncertainty will hurt the economic recovery, a pair of surveys showed on Monday.

The results of the Bank of Canada’s second-quarter business outlook survey and senior loan officer survey did not alter market expectations that the central bank will raise its key interest rate on July 20, but did reinforce some analysts’ views that it may proceed very slowly in withdrawing emergency-level stimulus.

In the business survey, companies reported for the first time in two years that past sales activity had improved. But the balance of opinion on future sales -- the difference between the percentage predicting higher sales minus those expecting a drop -- fell to 24 percent from 44 percent in the first quarter.

“Overall, businesses are generally positive about their near-term sales prospects, although they are concerned about recent global economic and financial uncertainties and possible spillover effects in Canada,” the central bank said in its report on the poll results.

The bank attributed the shifting mood on sales to the fact that some companies had already experienced a strong recovery and now expect the pace of growth to ease to more sustainable levels over the next year.

The survey showed a similar shift on future investment in machinery and equipment. However, the balance of opinion on future employment levels remained high and roughly unchanged from the first quarter.

In a sign that some slack in the economy is being absorbed, 39 percent of firms said they would experience varying degrees of difficulty in meeting an unexpected increase in demand, up from 30 percent in the first quarter.

Almost all expect inflation to remain within the Bank of Canada’s target range of between 1 percent and 3 percent.

The central bank pays close attention to the business survey for judging things like how much productive capacity is in use, which is hard to determine based on hard data alone, and to help fill in the blanks in its analysis of the economy.

Analysts say the results likely cement the bank’s intentions to raise interest rates on July 20.

“On balance, we retain a bullish bias in interpreting the results that is supportive of continued rate hikes from the Bank of Canada, including 25 basis points on July 20,” said Scotia Capital economists Derek Holt and Gorica Djeric in a note to clients.

Canada’s primary securities dealers unanimously predicted last week the central bank would lift its overnight rate for the second time in a row on July 20 to 0.75 percent.

On June 1, Bank of Canada Governor Mark Carney became the first Group of Seven central banker to raise rates after the recession, hiking by a quarter-point from a historic low of 0.25 percent after two quarters of robust economic growth.

Markets are pricing in an 81.7 percent chance of another hike on July 20, according to yields on overnight index swaps which trade based on expectations for the central bank’s key policy rate. The gage was unchanged after the survey results were released.

CREDIT MARKETS ON THE MEND

Both borrowers and lenders agreed that credit conditions improved in the second quarter.

Primarily large firms reported improved borrowing while small businesses said they experienced no change.

From the lenders’ point of view there was an improvement in both price and nonprice conditions and the Bank of Canada said that perspective appeared to be spread more widely among different categories of borrowers.

“This is encouraging as private sector spending will increasingly need to replace public sector expenditure as the fiscal stimulus is increasingly withdrawn,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

The balance of opinion pointing to easing credit conditions was the strongest since 2005, according to the loan officer survey.

For the first time since the credit crunch began in the third quarter of 2007, small businesses and commercial borrowers obtained improved price terms on their loans, the results showed.

Reporting by Louise Egan; editing by Peter Galloway and Rob Wilson

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